Monday, August 1, 2011

Debt Ceiling Deal—Good or Bad?

Of course it’s bad. It came from the federal government. Do you really need to know more than that?

However, it’s not as bad as it could have been, and frankly better than most of us had any right to expect.

A summary can be found here. You should read the summary, or you may not understand the rest of this. You can also see Speaker John Boehner’s (R-OH-08) slides on it here.

Here are my thoughts in a nutshell.

The good:

The deal gets us into early 2013. Many people think this should fall under the bad list, but I disagree. It will certainly be a campaign issue now, particularly since it’s going to come up so early in the next President’s term. But, since it won’t happen before the election, that will keep President Barack Obama (D-USA) from deliberately sabotaging the talks to win votes. And yes, I believe he’s capable of that.

The first round of cuts comes from the Boehner bill, not the Reid bill. That means that they’re real cuts (or at least as real as Washington, D.C. ever gets), and not number fakery.

I’m sure some on the right are annoyed that it doesn’t require a BBA, but nothing with a BBA requirement was ever coming back from the Senate. You’re fooling yourself if you think otherwise. Still, the fact that there’s BBA language in it at all is surprising. It also has some strength, as Congress has to accept the BBA if they can’t come to an agreement and don’t want across the board cuts. No, the BBA isn’t going to happen, but it is still a pretty big bargaining chip, even in the final deal.

The super committee has hard deadlines to come up with proposals that will pass Congress, and they have to pass the current Congress.

I mentioned previously that I like sequesters. I’m not particularly in love with this one, but again, its presence forces Congress to move. I like that.

There’s little doubt, that for now anyway, the Tea Party was the big winner. No, they’re not going to get all they wanted, or even very much of what they wanted, but they forced the movement of this entire debate to the right, and forced the solution to the right as well. They forced both sides to admit that we have a spending problem and a debt problem. As I’ve said previously, it’s going to take a while to turn this boat around. The Tea Party is making slow but steady progress in this direction.

The bad:

$350 billion of the cuts in the first tranche are from defense. That’s a lot. I’m not saying that we don’t overspend in defense, but in terms of GDP and size of budget overall, we’re at near historic lows, as the chart below shows:

The sequester tranche is unbalanced. 50% of the savings must come from defense. Medicaid and Social Security are excluded. Based upon my calculations earlier, this year’s budget breaks down this way: Social Security, 19.1%, Defense, 18.5%, Other, 18.4%, Unemployment & Welfare (estimated), 16.8%, Medicare, 12.9%, Medicaid, 7.8%, Interest, 6.5%. If you think it’s reasonable that defense should have to bear half the burden, while Social Security & Medicaid, which combined for 27% of the budget, should play no part, then you aren’t thinking clearly. By the way, that 50% for defense adds up to about $600 billion over the 10 years. On top of the $350 billion already in the first tranche. So, basically a trillion dollars. Unrealistic and unsafe.

The deal assumes the expiration of the Bush tax cuts on 1/1/2013. In fact, it appears to make that almost a requirement.

There’s no entitlement reform in the package. We weren’t going to get that with this President, but it still bears mentioning. Without entitlement reform, we can’t even claim to have taken a reasonable first step on solving our debt woes.

I’m not sure if this is enough to make the credit agencies happy. Actually, I know it’s not enough to make them happy. I’m not sure if it’s enough to keep them at their current level of unhappiness. This deal may not avert a credit downgrade. I think it will, but I wouldn’t be the farm on that. We’ll certainly still be on a watch list, and anyone who hasn’t at least dropped our outlook to ‘negative’ will almost certainly do so.

The ugly:

The whole tax hike situation definitely falls under ugly. Mostly because I can’t decide whether it’s good or bad. Boehner says that it will be almost impossible for the super committee to raise taxes. Others say that’s not true. First, the word “almost” makes me nervous. Second, the mere fact that we can’t figure out if Boehner is right means this part is definitely ugly. Here’s the description from the GOP.

It has an undefined mandate of deficit reduction but the way that is constructed would essentially make it impossible to raise taxes. Anything scored by CBO is based on current law. Current law assumes that taxes are going to go up by three-and-a-half trillion dollars next year [over ten years]. So anything you do to the tax code, unless it starts off with a $3.5 trillion tax increase, it’s going to be adding to the deficit … It’s almost impossible for them to touch taxes because if they do, almost anything will be scored as a tax cut, making it that much more difficult to reach the $1.5 trillion that they need to get to.

If you're scratching your head over that, you're not alone.

The whole process has been beyond ugly. However, there may be a silver lining to all of this. Democrats are like Muslims. They never forget when they feel they’ve been wronged. Witness the number of Democrats who still complain about President Bill Clinton’s (D-USA) impeachment or Vice President Al Gore’s (D-USA) Supreme Court loss to President George W. Bush (R-USA) regarding the FL vote in 2000. This means that any Republican President requesting any kind of debt ceiling increase will face even stiffer opposition than President Barack Obama (D-USA) has had to face. My interpretation of the Senate Rules (someone will correct me if I’m wrong) is that a debt ceiling increase bill would still require cloture, and therefore a 3/5 majority. Good luck getting any Democrats on board, Mr. Republican President. Even a Democrat President will face, at best, something similar to what we just went through. So, if you’re a Tea Party person, and trying to get our debt ceiling frozen, we may be nearing the point where that dream is a reality.

The entire BBA sideshow was a pointless distraction. Yes, it was nice to pass Cut, Cap & Balance, but afterwards there were better ways to focus our attention. As I said, I’m surprised that any BBA language has ended up in the final bill. But, even if it were to pass both chambers (two chances: slim and none), it still has to be approved by 2/3 of the states. My 7 year old daughter may be finishing med school by the time that happens. Not that a BBA wouldn’t be a good thing. But I’d rather concentrate on items that we can do now and have an actual chance of being enacted, like zero-based budgeting. If anything has shown the necessity of going to that, it has been this process. Both Boehner and Senate Majority Leader Harry Reid (D-NV) were made to look silly by the CBO when their bills didn’t do what they said they would. Why? Because they were using the wrong baseline to compare against. And if that doesn’t make your head spin, nothing will. Again, I’m not saying that I’m opposed to a BBA. In fact, I think we should continue to push for it. But we also need to push for solutions that will make things better until (and if) it gets passed.